Forget about W and U shaped recoveries. US cannabis name Ayr Strategies (Ayr Strategies Stock Quote, Chart, News CSE:AYR.A) is looking at a yo-yo shaped return to its pre-pandemic profitability.
That’s according to Andrew Semple, analyst for Echelon Wealth Partners who reported on Ayr’s first quarter 2020 financials in an update to clients on Thursday and reaffirmed his “Buy” rating and C$20.00 target price.
Vertically integrated Ayr Strategies, which has base operations in Massachusetts and Nevada including cultivation and processing facilities and cannabis dispensaries, announced its Q1 on Wednesday, showing revenue up four per cent sequentially to $33.6 million and adjusted EBITDA of $8.4 million, down from $9.2 million for the previous quarter. (All figures in US dollars except where noted otherwise.)
Both Nevada and Massachusetts have seen regulatory restrictions imposed due to COVID-19, with Nevada limiting all sales to delivery-only as of March 21 and Massachusetts suspended its recreational adult-use sales in March. But these restrictions are now being revised, with Nevada earlier this month allowing curbside pickup and Massachusetts this week indicating rec sales are about to recommence.
Ayr left the quarter with cash and equivalents of $9.9 million and cash flow from operations up 85 per cent sequentially to $7.4 million. In the quarterly commentary, Ayr management pulled its earlier 2020 guidance and said the company was dealing with the headwinds.
“Despite these limitations, in the first quarter we produced sequentially higher revenue and substantial adjusted EBITDA, and added material cash from operations to our balance sheet,” said CEO Jonathan Sandelman. “Since then, we have successfully accelerated our digital transformation initiatives and we expect to exit the challenges presented by COVID a materially stronger business, as evidenced by the rebound in ticket size, transaction volume and retail margins we are seeing thus far in May.”
Semple said Ayr’s Q1 came in-line with expectations, with the $33.6-million in sales stacking up against his $32.3-million estimate and the consensus $33.6 million, while the company’s $8.4 million in EBITDA compared to Semple’s $8.6-million estimate and the Street’s $10.3 million.
Semple said as long as cash continues flowing into the business, the impact of COVID-19 will be transitory with a return to growth coming soon.
“With cannabis businesses in Nevada and Massachusetts being amongst the most adversely impacted due to local COVID-19 policy responses, we acknowledge Q220 financial results may prove to be choppy, with a higher than normal uncertainty for Q320.
Nonetheless, we reiterate our Buy rating and target price of C$20.00/shr, as we see ample upside potential,” Semple wrote.
The yo-yo shape will come, Semple said, due to the quick return of business once state restrictions are lifted.
“Our key takeaway for investors is that we expect Ayr to be FCF positive in Q220, despite the headwinds. We believe this is owed to the quick and diligent response by Ayr’s management team, which we have often called one of the best in the industry. We have previously called for the COVID-19 impact on Ayr to be transitory, and now grow much more certain in this assertion,” Semple wrote.
The analyst’s C$20.00 target represented at the time of publication a projected return of 86.7 per cent.